Sunday, March 28, 2010

How to Find Market Tops for Gold & the Dow

Last week the general market continued to grind its way higher for yet another week. Overall I feel the market is very much over bought. We all know the market can stay in extreme overbought levels for extended periods of time making it very difficult to pick tops.

This is the reason I do not try to pick tops, but rather wait for a top to form before putting my money to work. While a bottom can be made in 1 day, tops tend to take days and some times months to complete.

A few things really stood out to me when looking back on last week’s price action.

1. Gold (GLD Fund) was only up 0.29% for the week while the gold mining stocks (GDX Fund) was down over 3.5%. This strong divergence really has me concerned about the price of gold in the near term. Gold stocks generally lead gold and if they are down 10x more than gold last week, we better watch out....

2. The US Dollar broke out and started to rally posting a gain of 1% for the week. It is definitely weird to see gold move higher when the US dollar is rising…

Gold GLD Daily Chart

Gold has been trading sideways/down since December. I see this large 5 month pullback as a bull flag and expect to see much higher prices for gold long term. But I don’t count my eggs before they hatch, so I continue to focus on the daily and intraday chart patterns for low risk trading opportunities.

Friday we saw gold close very strong for the day. It looks very much like a reversal candle but with the price trading under the mini head & shoulders neck line and with the US Dollar in rally mode again, I don’t think the stars are aligned enough for me to put money to work just yet.

Gold is currently trading in a major congestion zone. Until there is a breakout of this zone, I think setups will not be very accurate.

Dow Jones Industrial Average vs. NYSE New Highs Divergence – JANUARY

This chart shows the January 2010 peak in the stock market. As you can see prices became choppy with strong up and down movements before we saw the sharp drop.

Also note the NYSE new highs line. As the market became choppy new highs began to drop quickly. This indicated the market internals were weakening and led to an 8% drop over the next couple weeks.

Dow Jones Industrial Average vs. NYSE New Highs Divergence – MARCH

This chart in my opinion looks much the same as January. You can see the Reversal candle from the February lows and the strong rally to the current price, as of Friday.

Notice how the market is getting choppy. Also last Thursday the Dow gave us a reversal candle. But this time the reversal candle is to the down side.

Also note the NYSE New Highs line. It has dropped sharply indicating the market internals are weakening once again.

This is what trading is all about… finding things that are out of whack and waiting for a low risk setup in order to make a profit.

Weekend Trading Conclusion:

In short, the stock market is over bought and about to roll over. I do understand that this grind higher could last another week or so, which is why I am focusing on short/quick intraday movements like Friday’s SP500 Intraday Low Risk Setup, and not buying etf funds to hold for a few weeks. Most of you know I do not chase prices higher simply because down side risk increased when buying into an over extended rally.

I feel gold, silver and oil will move together and at this time, I don’t like their charts for trading. With any luck we could get some setups this week, but not counting anything just yet.